Another way to avoid the confusion of juggling multiple loans is to consolidate your loans. In some cases you may be able to eliminate multiple monthly loan bills, lock in lower interest rates, lower monthly payments and extend your repayment period.
Start exploring loan consolidation options during the grace period. If you are a new graduate with federal subsidized loans, the Federal Consolidation Loan Program may allow you to extend the repayment of your loans beyond the standard 10 years, depending on your loan balance. For example, physicians with loan balances in excess of $60,000 have up to 30 years to pay back their loans after consolidating. This federal program has a number of additional options that can improve your debt situation, reduce monthly payments by up to 50 percent and increase the amount of disposable income you have.
There are many loan consolidation programs that offer to consolidate private and federal debt together into one monthly payment. Although one monthly payment for all debt sounds tempting, the resulting interest costs are definitely not worth the convenience. The Federal Consolidation Loan Program is the most cost-effective way to manage your federal debt because the federal loans remain at a simple interest rate—meaning that you only pay interest on the principal balance you borrowed. By transitioning your federal debt into a private loan consolidation program, your federal debt will begin to compound interest and you will lose out on the low interest rates you received with federal loans. Private loans will most likely have higher interest rates than federal loans: therefore, one solution is to defer your federal loans until you can pay off your private loans. To pay less interest on your loans and pay them off faster, keep your federal loans within a federal consolidation program and manage your private loans separately.
Today, there are many lenders offering consolidation programs, all with unique borrower benefits. Physicians should seek out a lender who can answer questions specific to medical loans, and be flexible to a doctor’s busy schedule. Some lenders offer “teaser” interest rates that sound appealing, but are often unobtainable for most borrowers. So check the eligibility requirements of any benefit that is being offered to make sure that you qualify.
The government reduces a borrower’s interest rate when consolidating variable rate Stafford loans by 0.6% if the loans are consolidated during the borrower’s six-month grace period. The current interest rate for variable rate Stafford borrowers in-grace is 6.54% (on variable rate loans). Consolidating during the grace period will fix the interest rate at 6.625%. The following table depicts the monthly payments of a borrower who has consolidated during his/her grace period.
*For comparison purposes, this scenario assumes borrower makes monthly payments during grace period at the grace period interest rate.
The current interest rate for variable rate Stafford borrowers in repayment on unconsolidated loans is 7.14%. Consolidating during repayment will fix the interest rate at 7.25% over the life of the borrower's loans.
Note: If borrower takes the entire 30-year term to pay back the loan, he/she could save $15,120 by consolidating during the grace period (with $100,000 balance).
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